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It's that time of year again. Banks and research firms are publishing their outlooks for 2023, waggling their fingers in the air to see which way the wind's blowing...
Is there anything especially useful in these forecasts, or is it pure noise? Something to simply ignore?
Ok, the price targets can definitely be ignored. They're invariably wrong, prone to being revised and just generally pointless.
Themes within the research can be valuable though. It's a window into what the street is selling, the stories that people are buying, and the risks that are being completely ignored...
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Take a look back at the views for 2022 👇
Forecasting is hard. Let's pick on Goldman Sachs 👇
We expect less impressive returns for risky assets in line with a more mature cycle, with the best opportunities in macro divergence and cycle longevity after the synchronized rapid rebound in 2021. Our economists expect inflation to moderate and our rates strategists expect only a modest rise in long-term rates through 2022.
Less impressive returns for risky assets: Absolutely nailed that one.
Inflation to moderate and only a modest rise in long-term rates: Not so much.
This forecast was made before Russia decided to carve up Ukraine, so there are some mitigating circumstances (always the problem with forecasts... Stuff happens)
Did much better with their view on short-term rates though...
There is potential for rates to move beyond what is currently priced posing a significant risk not only to equities but to all asset markets.
Bank of America hit the mark 👇
We’re market bearish; “rates shock” in 2022 to follow “inflation shock” of 2021 and “growth shock” of 2020. Financial conditions set to tighten via Wall Street and/or policy action. Asset prices driven by rates and profits. Capital preservation will grow as a theme in the year ahead.
It really doesn't matter who's right or wrong though. It's more about scenario planning.
Take the Goldman outlook we covered here 👇
Key themes: The US economy outperforms, low probability of a US recession, and they add one more rate hike to their forecast. If this is accurate, does it make sense to be bearish the dollar?
The best-performing economy offering the highest yields suggests not.
How about an alternative scenario? Global recession. Everything goes to shit. Want to be short the dollar?
Which scenarios makes sense for sustained dollar downside?
Down the bottom... Some form of synchronised global growth is probably required. Whether this is the US economy catching down to everyone else, the rest of the world catching up, or a mix of both, synbchronisation is the most likely path to dollar weakness.
How about the stock market?
Morgan Stanley ruffled some feathers with their call for the S&P500 to reach a price trough of 3,000-3,300 in Q1 '23...
If you're bullish, this investor feedback to the call will be slightly concerning... 👇
We've gotten a fair amount of pushback on that our forecast on this front is too aggressive both from a magnitude and timing standpoint. While directionally bearish, many investors struggle to see even a retest of 3,500.
The best thing about sellside research is that they show their workings.
i.e. "Here's our view and here's what it's based on". Which is exactly what Morgan Stanley do here. It's all about earnings 👇
In our view, what was priced at the October lows was peak Fed hawkishness, not material earnings downside. If we were forecasting a modest 5% forward EPS decline and a reacceleration off of those levels, we'd concede that the earnings risk is probably priced, but we're modeling a much more significant 15-20% forward earnings downdraft, which should demand a more recessionary type 13.5-15x multiple on materially lower EPS.
So, earnings risks as the economy deteriorates will drive the stock market down.
They see a year end rally to 4,150, based on technical factors such as improving market breadth "even though the easy money has likely been made" and the fundamentals are soon set to take over to "complete this bear market".
Don't call it a Santa Rally though. The Santa Rally definitely exists but it doesn't start until after Christmas 👇